Behavioral Economics

Behavioral economics is a field of study that combines insights from psychology and economics to explore how people make decisions that deviate from those predicted by traditional economic theory. Unlike classical economics, which assumes that individuals are rational actors who always make decisions in their best financial interest, behavioral economics recognizes that people are often influenced by biases, emotions, and other irrational factors. This field examines how these factors affect decision-making, consumption, savings, and investment behaviors.

Example

The concept of “loss aversion,” where people fear losses more than they value equivalent gains, is a key principle in behavioral economics and can explain why investors might hold onto losing stocks longer than is rational.